January 8, 2013 by Greg Meckbach, Associate Editor
The Ontario Court of Appeal recently ruled that a landlord can proceed with a lawsuit against a tenant relating to damages arising from the escape of oil from an above ground storage tank, on the grounds that there was no clear indication of an agreement on the part of the property owner to insure against a loss alleged to have been caused by negligence on the part of the tenant.
Four years ago, Michael Cain, who owns land in North Gower, Ont., southwest of Ottawa, filed a statement of claim against several parties, including 1150320 Ontario Inc., which carries on business as The Antique Shoppe. The allegations against The Antique Shoppe include claims of both contract and negligence. The claims have not been proven in court.
According to court records, an oil spill occurred on Cain’s property in Dec. 2007 “as a result of damage to The Antique Shoppe’s above ground oil tank and its subsequent filling.
“In the course of cleaning up the spill from the above ground oil tank, contamination from a former underground fuel storage tank, of which the plaintiff had no knowledge, was also discovered,” according to background provided in a lower court decision in May 2012.
“Petroleum hydrocarbon contaminant was found in the soils and the groundwater in, and on the property and beneath the slab of the building. The contaminant also migrated to the neighbouring property. To effect the remediation of the property, it was necessary to demolish the building.”
In that decision, Ontario Superior Court Judge Monique Metivier ruled that the terms of The Antique Shoppe’s commercial lease agreement did not prevent Cain from bringing his claim against the store. Judge Metivier’s ruling was not on the merits of the lawsuit itself, which named several defendents, including an oil tank installation company and an engineering consulting firm. Metivier’s ruling was on a motion brought by The Antique Shoppe, where it sought to “establish that (the lease agreement means that the landlord and The Antique Shoppe) have allocated the risk of loss as between themselves and that this allocation serves as a waiver of all claims which could otherwise have been maintained against The Antique Shoppe either in contract or negligence arising from the use and operation of the leased premises.”
The question raised in the motion, according to court records, was whether the commercial lease between Cain and The Antique Shoppe “contains a covenant on the part of the lessor to insure against the loss alleged to have been caused by the negligence of the tenant.”
Judge Metivier ruled that the lease agreement did not, meaning that Cain’s lawsuit can proceed. The Antique Shoppe appealed Metivier’s ruling, but in a decision issued Dec. 28, The Ontario Court of Appeal agreed Cain’s lawsuit should not be dismissed.
“Based on the record before us and the state of jurisprudence, it is not plain and obvious whether the lease contained a covenant to insure for the loss claimed by (Cain),” the appeal court judges wrote. The appeal was heard by Judges Eleanore Cronk, Russell Juriansz and Sarah Pepall.
According to court records, the lease agreement contained the following clause:
“The Lessee covenants with the said Lessor that his said business to be so carried on in the said building will not be of such a nature as to increase the insurance risk on the said premises or cause the Lessor to pay an increased rate of insurance premiums on the said premises by reason thereof and it is distinctly understood that in case said business so carried on by the Lessee is or becomes of such a nature to increase the insurance risk or cause the lessor and/or other occupants of the said building to pay an increased rate of insurance premiums, that the Lessee will from time to time pay to the Lessor the increased amount of insurance premiums and which the said Lessee and other occupants of the said building have to pay in consequence thereof; provided that the Lessee covenants that he will not carry on or permit to be carried on any business in the said building which may make void or voidable any insurance held by the Lessor or the other occupants of the said building.”
The interpretation of the lease agreement, The Antique Shoppe claimed in its motion last May, should follow three Supreme Court of Canada decisions involving tenants’ responsibility for fire insurance.
“These cases set out that where a lease contains a covenant by the lessor to insure the premises against specific losses, then the risk of that loss has been allocated to the lessor, regardless if it was caused by the negligence of the tenant, and no claim in negligence may then be brought against the tenant,” Judge Metivier wrote in her analysis. “That principle is grounded in the fact that the covenant to insure by the landlord is a contractual benefit for the tenant. It is an assumption of risk by the landlord of the risk of loss or damage caused by the peril to be insured against. This is so no matter how the peril is caused, even if by negligence.”
But Judge Metivier also noted that “in the absence of facts where specific losses are set out in the covenant to insure, ordinarily a tenant is responsible for damages caused by its own negligence.”
To escape liability, she wrote, “the tenant must show either: (1) clear wording in the lease of a covenant on the part of the landlord to insure against the specific peril; or; (2) that the tenant is responsible for the payment of the insurance premiums for coverage for the specific peril, and is therefore entitled to the benefit of the insurance for which it paid.”
Metivier included as examples wording from a lease quoted in a 1977 decision by the Supreme Court of Canada involving the department store Eaton’s, whose leased space was destroyed in a fire and whose landlord’s insurer paid claims on the loss but then exercised subrogation rights in attempting to recover money from Eaton’s.
One clause reads “.. THE LESSOR covenants with the Lessee that he will, throughout the currency of this lease and any extension thereof, hereunder keep the buildings upon the said premises insured against loss by fire in an amount not less than their insurable value.”
Metivier also cited another case quoting an example of a lease in which the tenant would be responsible.
In African Caribbean Grocery Inc. vs 732718 Ontario Inc., a lease was quoted with clauses requiring the tenant: “To effect and maintain property damage insurance and fire insurance … to waive any right of subrogation against the landlord (or those for whom the landlord in law is responsible) … That the landlord would not be responsible for any loss or damage to the property belonging to the tenant, its employees or invitees … and to indemnify the landlord from all losses in respect of the above.”